Coinbase executes 20% of trading volume on their own exchange; Bitfinex and Poloniex included

2018-09-20

On 18th September, the State of New York Attorney General, Barbara D. Underwood released a report called “Virtual Markets Integrity Initiative”. The report stresses on the concern related to the transparency, fairness, and security of cryptocurrency trading platform.

The report speaks about the potential conflict of interest created by the business and operational roles of the exchange platforms. The Attorney General stated that managing conflict of interest is becoming a serious issue in the cryptocurrency marketplace. The report outlines 4 concerns of managing conflict of interest.

The first concern is related to the listing of cryptocurrencies on trading platforms. The report stated there is less information on how the tokens are listed and whether the payments to the exchange platform in the form of cash or cryptocurrency, influence the listing of the token.

The second concern is that the owners and investors of a majority of the platforms hold a large amount of cryptocurrencies which is traded on the exchange platform. The report stated that this is to ensure a continuous rise of those currencies. The third concern is similar to the second, the report claims that the employees of the exchange trade on their own platform “against their customers”.

They further added:

“…potentially using non-public information to inform their trades. Fourth, apart from individual employee trading, several trading platforms themselves trade on their own venue in a proprietary capacity.”

The NYAG’s report states that the exchanges engage in trading on their own platform because of two reasons. The first is that they might be trading to make profits just like an average trader or they could be posing as a market maker to establish liquidity for various assets on the exchange. They noted that even as broker-dealers do this in the traditional marketplace, this requires a significant commitment to customer protection.

The platforms which are trading on their own platform are Coinbase, Bitfinex, bitFlyer, Poloniex and Tidex. The platforms which do not trade on their own platform are Bitstamp, Bittrex, Gemini and HBUS.

The AG claimed that Poloniex engages in less than 1% of the executed volume on their platform, Bitfinex in 10% and Coinbase is involved in over 20% of the executed volume their exchange platform. The report further added that this high level of “proprietary trading raises serious questions” about the risks the customers have to face on these exchange platforms.

The report stated:

“As a general principle, when a significant percentage of the volume in one or more assets on a venue is attributable to one source, customers face the risk that the availability of liquidity in those assets could change, without notice and at any time, including when liquidity is needed most – namely, in times of market volatility or rapid price movement.”

It further added:

“That certain platforms themselves account for such high levels of activity on their own venues also calls into question whether the natural market for virtual currencies on those platforms is as robust as customers might believe it to be.”

The report stated that these factors have led to a conflict between the interest of the customers, the exchange platform and the employees of the exchange platform. The Attorney General recommends the investors to be a part of a platform which ensures that all the trade are executed equally and carefully.